As noted in our recent blog post on the broad effects of scholarship award displacement, the white paper recently released by The National Scholarship Providers Association examined the effects of award displacement in depth, and concluded with recommendations to help mitigate award displacement. The recommended measures are based on the key findings in the white paper, and call for system-wide changes to a variety of policies and practices in order to reduce or eliminate this phenomenon that can have such a negative impact on students and their families. We’ll break these down here:

Federal Policy Recommendations: Sweeping Changes to Status Quo

The NSPA proposes several different ways for federal policies to change for the benefit of students and their families:

• The first seems obvious, but has not been reduced to a formal policy—setting an official across-the-board priority order that institutions receiving and disbursing federal aid must follow. Financial need would be reduced first by grants, then by student employment, and last by loans. To recap the current policy, certain kinds of federal aid (e.g., the Pell Grant) are considered “first dollar” aid and not subject to reduction if scholarships are also received, while others are considered “last dollar” (e.g., Perkins loans, Federal Work Study programs, Stafford Loans) and are eligible to be eliminated if supplanted by private scholarship funds.
• Alternatively, the federal policy definition of estimated financial assistance could be amended to remove references to private scholarships (and fellowships). Once removed, scholarship funds become a surplus, not a tool to displace other forms of aid.
• The overaward tolerance cushion of $300, which is determined by the type of federal aid awarded and is a balance between the extra money a student may keep and use for personal expenses versus the work involved on the part of the institution to re-write the financial aid package to reduce overall award, could be increased to $1,000.

Additional considerations at the federal level:

• Expand tax-free treatment of scholarships (beyond tuition, required fees, books, supplies and equipment) to apply to living expenses and other costs of attendance, which would reduce limitations on scholarship use that can hamper students (see below).
• Include variables such as student health insurance in the federal definition of Cost of Attendance.
• Establish an apples-to-apples format of financial aid award letters requirement for Title IV institutions to allow students to more accurately compare costs across institutions.
• Allow the minimum expected family contribution to fall below zero when the student/family income is below the poverty level (currently the lowest EFC is zero).

Institutional Policy Recommendations: Transparency and Flexibility

• Topping the NSPA list of suggestions to institutions is to improve their disclosure practices and publish their financial aid policies, particularly the extent to which an institution may allow private scholarships to displace other forms of institutional financial aid. Providing transparency around current costs and estimated increases in conjunction with the final financial award package will allow students to accurately predict the true cost of education, and the effect that private scholarships may or may not have on their bottom line.
• Similar to the federal priority determination discussed above, institutions should implement consistent policies for types of awards, with the end goal to allow scholarships to first replace loans and student employment, rather than displace institutional grants.
• Financial aid administrators should have more leniency to lower the estimated family contribution, eliminate the summer work contribution expectation, and to include non-traditional costs such as student health insurance and a computer purchase when determining the cost of attendance. This dovetails with the federal policy changes, but in the absence of federal change, can be implemented at the institutional level.

Private Scholarship Provider Recommendations: Communication is Key

Clearly there are plenty of opportunities for good intentions to go awry. In their recommendations to scholarship providers, the NSPA encourages scholarship providers to take an active role with their applicants.

• Restrictive scholarships can turn into too much of a good thing. In our previous post, we explained how scholarships restricted to tuition can displace similar tuition-only scholarships. The NSPA encourages providers allow a more general use of funds, or defer the award to the following year.
• Scholarship providers can educate the students, not only on the requirements to obtain the scholarship, but in other areas of financial literacy. While FAFSA and the Department of Education have online tools, private scholarship providers have an opportunity to interact with the students personally.
• Think outside the vacuum—the NSPA further suggests that students authorize their scholarship provider to communicate on their behalf with the institution’s financial aid office to shape the final need-based award. Conversely, scholarship providers should provide their policies and criteria to the institution so it can be considered in advance of the institution’s award determination. Both parties have flexibility, and if used proactively in tandem, can work to all parties’ advantage.

Breaking Down Silos

These recommendations are not intended to pit the student against the institution, or the institution against the federal regulations. Rather, the collective message of the recommendations above is that federal, institutional and providers all play a key role in students’ financial health – during and after enrollment – and all parties should consider altering some of their policies for the benefit of students. Implementing changes at their respective levels can make the scholarship award/financial aid determination process more cohesive and eliminate the negative financial impact on students’ ability to afford higher education.

At Leaffer Law, we will continue to monitor developments resulting from the NSPA white paper and related scholarship issues, and will advise readers of these developments in future blog postings.